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Questions and Answers of Finance

Up-Front Bank is now offering a two-year discount loan for 10%. Working backwards, what are the available funds at the start of the loan and the implied balance at the end of the first year if the
As We Go Bank offers its customers a line of credit loan in which each month’s outstanding balance requires a 12% (APR). What are the monthly interest payments required on the following loans and
In Problem 7, Loan A and Loan D borrow the same amount each year. However, Loan A borrows every month, and Loan D borrows every other month (note that the borrowing for Loan D for January equals the
Astro Investment Bank has the following bond deals under way:Determine the net proceeds of each bond and the cost of the bonds for each company in terms of yield. The bond yield in the table is the
Lunar Vacations needs to raise $6,000,000 for its new project (a golf course on the moon). Astro Investment Bank will sell the bond for a commission of 2.5%. The market is currently yielding 7.5% on
Berkman Investment Bank has the following bond deals under way:Determine the net proceeds of each bond and the cost of the bonds for each company in terms of yield. The bond yield in the table is the
Rawlings needs to raise $40,000,000 for its new manufacturing plant in Jamaica. Berkman Investment Bank will sell the bond for a commission of 2.5%. The market is currently yielding 7.5% on
Astro Investment Bankers offers Lunar Vacations the following options on its initial public sale of equity: (a) A best-efforts arrangement whereby Astro will keep 2.5% of the retail sales or (b) A
Using the information in Problem 13, what is the break-even sales percentage for Lunar Vacations? What are the proceeds to Lunar Vacations and Astro Investment Bankers at the break-even sales
Bruce Wayne is going public with his new business. Berkman Investment Bank will be his banker and is doing a best-efforts sale with a 4% commission fee. Wayne has been authorized 5,000,000 shares for
Use the same information from Problem 15. What if the auction bids total only 2,640,000 shares, as follows:Bidder ......... Quantity BidXYZ Pension Fund ...... 1,200,000Clark Kent Investors .....
Criss-Cross Manufacturers will issue commercial paper for a short-term cash inflow. The paper is for 91 days, has a face value of $50,000, and is anticipated to sell at 96% of par value. Criss-Cross
Criss-Cross has decided that it will need to raise more than $3,000,000 in commercial paper (see Problem 17). Criss-Cross must now raise $5,000,000, and the paper will have a maturity of 182 days. If
This case reviews the life cycle of a successful business from angel financing, through the venture capital stage, and IPO liquidity event. It also covers shorter-term borrowing decisions and
Risk R Us Investors has a success ratio of 15% with its venture funding. Their owners require a rate of return of 25% for their portfolio of lending, and the average length on each loan is 4 years.
You want to borrow $250,000 for 1 year from your bank and are given the following 2 options:1) Pay $35,000 per month for 12 months starting at the end of the 1st month.2) Take a discount loan at the
The Fire-Keepers Casino is in the process of issuing a 25-year, 9% coupon (paid semi-annually) AA2-rated corporate bond with $1000 par value. If by the time the bonds receive SEC clearance, the
Big Apple Investment Bankers offers Northern Diagnostics the following options on its initial public sale of equity: (1) a best-efforts arrangement whereby Big Apple will keep 2 % of the retail sales
Cereal City Instruments will issue commercial paper for a short-term cash inflow. The paper is for 182 days, has a face value of $50,000, and is anticipated to sell at 94% of par value. Cereal City
Why would one lender charge more for a loan to different borrowers? Why would two different lenders charge different rates to the same borrower?
What is the advantage of financial leverage, the degree to which a firm or individual utilizes borrowed money to make money?
What is asymmetric information? How does it affect the prioritization of financing sources under the pecking order hypothesis?
What does it mean when one states that the operating and financing decisions are separate from each other? How do we view the financing decision in terms of the magnitude of effect?
Who loses out on a company’s cash flow when it adds more and more debt is added to the financing structure? Who gains as a company when more and more debt is added?
In a world of taxes and no bankruptcy, why is a company's optimal capital structure all debt? What happens when a company adds bankruptcy to the world of taxes with regard to the optimal capital
In the static theory of capital structure, how do you find a firm's optimal capital structure? In other words, what benefit are you receiving as you add debt, and what cost are you incurring when you
Winthrop Enterprises is a holding company (a firm that owns all or most of some other companies’ outstanding stock). Winthrop has four subsidiaries. Each subsidiary borrows capital from the parent
Keith Peterson is the CFO of Springfield Soups and Sauces. The company’s typical success rate for new products is 88%. Keith wants to improve this success rate to 94%. What loan improvement (in
Wilson Motors is looking at expanding its operations by adding a second manufacturing location. If successful, the company will make $450,000. If it fails, the company will lose $250,000. Wilson
What is the breakeven probability of success at the 15% borrowing rate in Problem 3? What is the breakeven probability of success if the loan rate is 20%?
Alpha Company is looking at two different capital structures, one an all-equity firm, and the other a leveraged firm with $2,000,000 of debt financing at 8% interest. The all-equity firm will have
Beta, Gamma, and Delta companies are similar in every way except for their capital structures. Beta is an all-equity firm with $3,600,000 of value and 100,000 shares outstanding. Gamma is a leveraged
Rachel can raise capital from the following sources:What is Rachel€™s weighted average cost of capital if she needs to raisea. $10,000?b. $20,000?c.$30,000?
Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis (POH) philosophy when she raises capital for company projects. Currently, she can borrow up to $600,000 from her
Chandler has been hired by Cooking for Friends to raise capital for the company. Chandler increases the funding available from the bank to $900,000, but with a new rate of 8.75%. Using the data in
Air Seattle is looking at changing its capital structure from an all-equity firm to a leveraged firm with 50% debt and 50% equity. Air Seattle is a not-for-profit company and therefore pays no
Roxy Broadcasting, Incorporated is currently a low leveraged firm with a debt-to-equity ratio of 1/ 3. The company wants to increase its leverage to 3/1 for debt-to-equity. If the current return on
Air Seattle from Problem 11 has lost its not-for-profit status, and the corporate tax rate is now 35%. If the value of Air Seattle was $5,000,000 as an all-equity firm, what is the value of Air
Roxy Broadcasting in Problem 12 was originally an all-equity firm with a value of $25,000,000. Roxy now pays taxes at a 40% rate. What is the value of Roxy under the 1/3 debt to equity capital
Using the information from Problems 11 and 13 on Air Seattle, determine the size of the tax shield with a corporate tax rate of 15%, 25%, 35%, and 45% if Air America’s capital structure is 50/50
Using the information from Problems 12 and 14 on Roxy Broadcasting, determine the size of the tax shield with a corporate tax rate of 15%, 25%, 35%, and 45% if Roxy’s capital structure is 1/3
Air Seattle has an annual EBIT of $1,000,000, and the WACC in the unlevered firm is 20%. The current tax rate is 35%. Air Seattle will have the same EBIT forever. If the company sells debt for
Roxy Broadcasting has an annual EBIT of $3,500,000 and a WACC of 14%. The current tax rate is 40%. Roxy will have the same EBIT forever. The company currently has debt of $6,250,000 with a cost of
This mini case requires students to focus on the impact of capital structure alternatives on earnings per share at various levels of EBIT, but also directs them to consider the implications of the
Diversified Holdings has three subsidiaries, each of which borrows funds from the parent company and has a different success rate with the projects it undertakes. Subsidiary A is successful with its
Loyola Turbo Engines is looking at expanding its operations by adding another manufacturing location. If successful, the company will make $750,000, but if it fails, the company will lose $300,000.
The Fast-Track Co. has thus far only used equity to finance its operations and currently has 1,000,000 shares outstanding with an EBIT of $1,500,000. The newly-hired CFO firmly believes that the firm
McRonald’s, which is currently valued at $10,000,000, is looking at changing its capital structure from an all-equity firm to a leveraged firm with 50% debt and 50% equity. Since McRonald’s is a
Sea Crest Corporation, which is an all-equity firm has an annual EBIT of $2,540,000, and a WACC of 15%. The current tax rate is 35%. Sea Crest Corp. will have the same EBIT forever. If the company
What does it mean to be a beneficiary owner of stock? Why would individuals find this ownership stake convenient?
How does a stock dividend differ from a cash dividend? Is one better than the other from the shareholder’s perspective?
In a world of taxes when the capital gains tax and the ordinary income tax rates are the same is dividend policy relevant? Why or why not?
Contrast a residual dividend program with a sticky dividend program.
Under what condition would a shareholder prefer a share repurchase over a cash dividend? Under what condition would a shareholder prefer a cash dividend over a share repurchase?
Why is a dividend reinvestment program attractive to a shareholder that plans on increasing his or her holdings in a company?
Atlantis Manufacturing, Inc. issues the following press release: “Atlantis Manufacturing will pay a quarterly dividend of $0.50 per share to record holders as of the 10th of this month on the 20th
Camelot Manufacturing, Inc. issues the following press release: “Camelot Manufacturing will pay a quarterly dividend of $1.00 per share on the 20th of the following month to record holders as of
Using the information in Problem 1, determine what the stock price of Atlantis Manufacturing will be after the cash dividend announcement in a world of no taxes. Assume that the current price is
Jenny plans to sell 200 shares of ExxonMobil stock. Exxon-Mobil has just declared a $0.45 cash dividend per share payable in 40 days to registered owners 20 days from now. If on the ex-date the price
Refer to Table 17.2 and predict the next dividend using a percent change pattern, a dollar change pattern, and your expectation given the actual pattern change.PepsiCo Quarterly Cash Dividend
Go to a web source such as Yahoo.com and find the recent dividend payment history of Coca-Cola and predict the next dividend change in size and timing.
Erik owns 2,000,000 shares of Wiseguy Entertainment. Wiseguy just declared a cash dividend of $0.05 per share. The stock is currently selling for $5.00. If Erik wants an annual “dividend income”
Carmen owns 300,000 shares of Wiseguy Entertainment. Wiseguy has just declared a $0.20 per share dividend on a stock selling at $25.20. What must Carmen do if she wants no cash dividends at this
Scott currently owns 500 shares of Twelve Colonies, Incorporated. Twelve Colonies has a high-payout dividend policy, and this year will pay $2.00 cash dividend on its shares selling currently at
Kevin currently owns 800 shares of Cylon, Incorporated. Cylon has a low-payout dividend policy, and this year will pay $0.35 cash dividend on its shares selling currently at $21.00. Kevin wants a
Refer to Problem 9. Assume that Scott is now taxed at 20% on dividend distribution and 20% on capital gains. Assume also that Scott originally paid $18 for these shares. If Scott only wants to
Refer to Problem 10. Now assume that Kevin bought the stock at $17.00 per share and his tax rates are 30% on dividends and 15% on capital gains. If Kevin changes the dividend policy from a
Southwest Tires declares a stock split. The current price is $82.00 per share, and you own 300 shares. The split is a 4-for-1 split. What is the expected after-share price, and what is your wealth
Northeast Tires announces a reverse split. The company will consolidate outstanding shares through a 1- 5 split. That is, every 5 shares you currently own will be consolidated into 1 share. The
Northern Railroad has announced that it will buy back 1,000,000 of its 30,000,000 shares over the next year. If the stock is selling for $23.40, what is the equivalent cash dividend that the company
Southern Railroad has announced the following stock repurchase plan: $5,000,000 repurchase over the next month. Current price of Southern Railroad is $18.50 per share, and there are 15,000,000 shares
Eastern Railroad has a dividend reinvestment program for shareholders. Over the past five years, the company has had the following share prices and the following dividends.If you started with 100
Western Railroad has a dividend reinvestment program for shareholders. Over the past five years, the company has had the following share prices and the following dividends.If you started with 100
This case requires students to apply theoretical concepts relating to dividend policy in a realistic situation. It covers the full range of ideas studied in the chapter and asks students to extend
On April 4th, Forex Corporation announced that it would pay a dividend of $0.75 per share to all shareholders that were on record as of April 11th, with checks being mailed on April 21st. Determine
Joan currently owns 800 shares of RST Inc. RST has a high-dividend-payout policy and this year will pay $3.00 cash dividend on its shares selling currently at $30.00 per share. Joan wants a
Pearl currently owns 600 shares of Ajax, Incorporated. Ajax has a low-payout dividend policy, and this year will pay 4% cash dividend on its shares selling currently at $40. Pearl wants a
Get Real Inc. has announced that it will buy back 3,000,000 of its 27,000,000 shares over the next year. If the stock is selling for $15.30, what is the equivalent cash dividend that the company
Comtrak Inc. has a dividend reinvestment program for shareholders. Over the past five years, the company has had the following share prices and the following dividends.If you started with 100 shares
What effect can cultural differences have on the ownership structure of a foreign operation of a multinational business?
What are intellectual property rights? How have changes in technology impacted the ability to protect intellectual property rights?
What does it mean to nationalize a business? How can a domestic company minimize the risk of nationalization of its foreign operations?
Explain how purchasing power parity determines the exchange rate between two currencies.
How can a changing exchange rate impact a company’s profits on one of its foreign operations?
Explain how translating a foreign balance sheet for inclusion in a multinational’s domestic balance sheet can violate the accounting identity.
While traveling in the following countries you see 20-ounce plastic bottles of Coca-Cola. You know the price in the United States for a coke is $1.09, but the countries have the following
While traveling in various countries, you occasionally resort to U.S. food. You pay the following prices for a Big Mac:India – 210 rupeeKuwait – 1.39 dinarSweden – 34.90 kronaUkraine – 133
You are taking a trip to six European countries. It is a ten-day trip, and you are taking $3,500. The current direct conversion rate is 1.2150 for euros. While in Europe, you spend € 2638.30. You
On the day you arrive in England, the exchange rate for U.S. dollars and British pounds is $1:£0.58. While you remain in England for the next two weeks, the exchange rate falls to $1:£0.54. When
You plan on traveling to Japan and China on a business trip. You will first stop in Japan, where the current direct exchange rate is 0.0092. You will next stop in China, where the current direct
Fill in the missing cross rates and direct rates in the table below:International CrossRates
Great Exchanges, Inc. is a currency exchange company located at most international airports. Today, a clerk has made a mistake on one of the currency exchanges and has posted the following
Using the data from Problem 7, determine what you would lose if you went the wrong way for the arbitrage. Explain this result.
The Wall Street Journal lists forward rates for Japanese yen. Say that the current listings are:1-month forward rate (indirect) 103.173-month forward rate (indirect) 102.686-month forward rate
Determine what the real interest rates are in the following countries, given their nominal interest rates and inflation rates:Canada: inflation is 4.5%, and the nominal risk-free interest rate is
Determine the nominal rates for the three countries listed if they have the following inflation rates and the real rate the world over is 1.25%.Canada: inflation is 4.5%.Switzerland: inflation is
International Products has contracted for 5,000 winter hats from Russia. The contract price is 1,375 rubles per hat. The current direct exchange rate is 0.03562. The expected inflation rate for the
Copy-Cat, Incorporated has signed a deal to make vintage Nissan 240-Z sports cars for the next three years. The cars will be built in Japan and shipped to the United States for sale. The current
Just before Copy-Cat, Incorporated starts the project outlined in Problem 15, the government announces new anticipated inflation numbers. For Japan, the estimate is a higher inflation rate of 5%. For
Surfboards USA wants to expand its operations to Australia. The current indirect exchange rate is 1.45 for U.S. and Australian dollars. The anticipated inflation rate is 3% in the United States, but

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